In its usual last-minute frenzy, the Iowa General Assembly passed a bill (HF 625) to extend the popular School Tuition Organization credit. The credit is 65% of the amount contributed to organizations that subsidize private elementary and secondary tuition. When combined with the federal tax deduction for the donation, there is very little out-of-pocket cost for the donations. The amount of the credit is limited, so it has been oversubscribed in recent years. the bill increases the cap starting in 2013.
The bill has a surprising amendment that passed yesterday: it now creates “affiliate nexus” in Iowa (my emphasis):
(1) A retailer shall be presumed to be maintaining a place of business in this state, as defined in paragraph “a”, if any person that has substantial nexus in this state, other than a person acting in its capacity as a common carrier, does any of the following: (a) Sells a similar line of products as the retailer and does so under the same or similar business name. (b) Maintains an office, distribution facility, warehouse, storage place, or similar place of business in this state to facilitate the delivery of property or services sold by the retailer to the retailer’s customers. (c) Uses trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the retailer. (d) Delivers, installs, assembles, or performs maintenance services for the retailer’s customers. (e) Facilitates the retailer’s delivery of property to customers in this state by allowing the retailer’s customers to take delivery of property sold by the retailer at an office, distribution facility, warehouse, storage place, or similar place of business maintained by the person in this state. (f) Conducts any other activities in this state that are significantly associated with the retailer’s ability to establish and maintain a market in this state for the retailer’s sales. (2) The presumption established in this paragraph may be rebutted by a showing of proof that the person’s activities in this state are not significantly associated with the retailer’s ability to establish or maintain a market in this state for the retailer’s sales.
This ratifies the aggressive approach of the Iowa Department of Revenue on intangible nexus, and will likely trigger more audits of out of state companies. The Supreme Court and Congress really need to either reaffirm the Quill decision or set new rules.
The IRS is broken, that’s for sure. But the IRS is a symptom. The “disease” is the tax code. I think that’s absolutely right. And for me, this latest “scandal” concerning the IRS is going to make it impossible to reform our tax code anytime soon.
If Iowa’s income tax were a car, it would look like this.
The Iowa General Assembly nears the end of its annual rampage. While it finally did something to improve a bad commercial property tax system, it managed to make an already awful income tax a little worse.
The Iowa Senate cleared a property tax plan (SF 295) yesterday to reduce commercial property assessments by 10%, with additional property tax credits for smaller businesses. Unfortunately, the price was to more than double Iowa’s version of the fraud-plagued Earned Income Tax Credit and, it appears, to clutter up the 1040 with additional petty tax credits — those these provisions are apparently part of a separate bill.
As if that weren’t enough abuse to the income tax, the Senate also increased Iowa’s tax credit corporate welfare budget by $50 million (HF 620) by increasing the amount of tax credits that the economic development bureacracy can hand out. They sweetened the corporate welfare pot by enabling the diversion of employee withholding to local crony capitalist slush funds economic development funds.
Another bill, HF 625, increased the popular school tuition credit, a poor substitute for true school choice.
While the politicians will pat themselves vigorously on the back, the net result isn’t very exciting. Yes, lower rates for commercial property are needed. But now Iowa’s dysfunctional income tax is larded with even more corrupt special interest favors, which will make it that much harder to ever enact a system that makes sense for taxpayers without lobbyists and connections.
Our average combined rate of 39.1 percent is the highest in the industrialized world. In an increasingly globalized world, this matters more today than it did the last time we reformed the code in 1986. Today the U.S. has to compete with countries around the globe who are constantly improving their tax codes. When the U.S. fails to do so itself, American consumers, workers, and shareholders lose out.
Politicians created the current corporate tax system and the current system is broken. If you are going to set out a menu of options for corporations to reduce their tax burden, don’t be surprised or upset that corporations take advantage of them.
It’s too bad that the cost of a sensible property tax is a big increase in a program that is a poverty trap for honest taxpayers and a pinata for thieves. The phase-outs of the EITC result in shockingly-high marginal tax rates on each additional dollar earned by relatively low-income taxpayers.
The EITC is refundable, which means it is really a welfare program run through tax returns. About 25% of the EITC is claimed “improperly,” which is a nice way to say it’s stolen. The annual cost of the Iowa EITC boost is estimated at $35 million, so the price of fixing a broken commercial property tax regime is an $8 million annual thief subsidy. So while the politicians celebrate their great compromise, Iowa’s petty thieves also have occasion to raise a glass, filled by you.
It is unlikely that Republicans will find Paul’s smoking gun, but the IRS scandal is almost certainly the result of political bias on some level. It is hard to believe that a group of officials would innocently pick terms like “Tea Party,” “patriot,” and “9/12” to single out organizations for additional scrutiny. It would be incredible to find such disinterested tone-deafness even in the most politically insulated of civil servants (and the IRS is far from insulated).
I doubt the White House left fingerprints on IRS efforts to harass political opponents (though it didn’t lift a finger to stop it). That leads to an even more depressing possibility: that the IRS went out its way to beat up on the President’s opponents on its own. Nobody blew the whistle. That means IRS management is so corrupt and political that it would go after the administration’s political opponents with only a wink and a nudge. And anybody who doesn’t think this was politically-motivated is kidding themselves.
And the IRS scandal was a subversion of democracy on a massive scale. The most fearsome and coercive arm of the administrative state embarked on a systematic effort to suppress citizen dissent against the party in power. Thomas Friedman is famous for musing that he wishes America could be China for a day. It turns out we’ve been China for a while.
Politicians advance plan to allow politicians to give more tax money to private businesses. From TheGazette.com:
Iowa communities would be able to designate special 25-acre development zones and use a share of sales tax and hotel-motel tax revenues to assist private projects of at least $10 million under legislation that’s getting bipartisan support.
House File 641 would establish reinvestment districts designed to spur development of “big ideas,” said Sen. Matt McCoy, D-Des Moines, who led a Senate Ways and Means subcommittee that revamped the bill representatives approved 87-9 last month.
This is, of course, an awful idea. Politicians are notoriously bad at allocating investment capital, and they tend to make sure it goes to their cronies and contributors. But when the state’s Governor, a member of the purported small government party, does an end-zone dance over a giant federal subsidy to a private utility controlled by a billionaire, the battlefield is left to the crony capitalists. The House version of HF 641 passed 87-9.
New York State’s comptroller says giving $2.8 billion in tax breaks over five years added more than a million jobs, which would be great news except that the state lost jobs.
I’m confident Iowa’s job-creating tax breaks work just as well.
For capital gains, the current law is already out-of-step with international standards. After the fiscal cliff, combined state and federal capital gains rates increased from 19.1 percent to 28 percent. This is more than 10 percentage points higher than the international average. One suggestion, of course, is to tax capital gains at the rate at the 1986 rate of 28 percent. This would push America’s average combined federal and state capital gains rate to more than 35 percent, more than double the international average.
A chance traffic stop on I-75 in Lee County uncovers a massive tax fraud scheme. Deputies say the woman accused used her job to steal personal information – even stealing from people who were dead.
Thursday, 23-year-old Tequila Gordon was sitting in the Lee County Jail. Her bond was set at $72,000.
Prosecutors say she worked at liberty tax services in 2009 and stole personal information from dozens of people.
I would think having a first name of “Tequila” would make getting a good job challenging. It won’t be any easier now.
Iowa House approves two new bumper stickers for this car.
The Iowa House of Representatives advanced two corporate welfare provisions yesterday.
SF 433makes it easier for businesses with “pilot projects” to keep employee withholding under a “target jobs withholding tax credit” program. It never says what exactly the “pilot projects” are supposed to prove — maybe if you divert employee withholding to the employer, they like that? This additional clutter to Iowa’s already byzantine tax law passed 97-2, opposed only by Bruce Hunter (D., Des Moines), and Charles Isenhart (D., Dubuque).
Legislation aimed at helping some Iowa border communities compete with neighboring states is on its way to the governor.
The targeted jobs program allows qualifying businesses to apply for state withholding tax credits if they plan to relocate or expand in Iowa, provided they are creating or retaining jobs.
“Creating or retaining” jobs? Doesn’t that happen whenever you hire someone? If you want Iowa to “compete” with neighboring states, make the whole tax law competitive. It’s not just border cities who suffer from a bottom-tier business tax climate.
SF 436expands the amount of Historic Rehab Credits available, increasing the distortion of property markets by subsidy, generally for the benefit of the well-connected developers who know how to play the game. This one passed 97-2, with only Rep. Hunter and Rick Olson (D., Polk) voting no.
As for actual good policy — simplifying the law, lowering rates, and doing something for people without lobbyists — nothing. The closest thing to it this session, the flat Alternative Maximum Tax (HF 478), is dying in the Senate. So once again it looks like the legislature will go home having only added more barnacles to the Iowa income tax.
Legislator insists that thieves get $11 million as price of property tax deal. As Iowans pay their 2012 balances due on today’s state income tax deadline, they may want to take a moment to ponder how careful the legislature is about spending the money they are sending in.
The Des Moines Register reports that Senator Joe Bolkcom demands an increase in the Iowa earned income credit as the price of a property tax bill:
Sen. Joe Bolkcom, D-Iowa City, chairman of the tax-writing Senate Ways and Means Committee, spoke at a Statehouse news conference sponsored by The Coalition for a Better Iowa, which released a booklet with the stories of Iowans who have been helped by the earned income tax credit. About 200,000 Iowa working families receive the tax credit, which assists households with incomes under $45,000.
Senate Democrats want to raise the earned income tax credit from 7 percent now to 20 percent at a cost of about $55 million annually.
Both Sen. Bolkcom and the Register fail to mention the massive fraud rate of the earned income tax credit. The Treasury Inspector General for Tax Administration this month reported:
The IRS estimates that 21 to 25 percent of EITC payments were issued improperly in Fiscal Year 2012. The dollar value of these improper payments was estimated to be between $11.6 billion and $13.6 billion.
Applying that fraud percentage to Sen. Bolkcom’s proposal will result in $11.5 million to $13.75 million in “improper” — mostly fraudulent — Iowa EITC payments. Remember that the EITC is a “refundable” credit, which means that if it exceeds your tax, the state writes you a check. It’s a spending program, a welfare program.
I would say it takes a special kind of legislator to demand $55 million in spending knowing that it’s an appropriation of at least $11 million to thieves, but really it just takes a run-of-the-mill legislator spending your money instead of his own.
The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.
Only somebody who doesn’t prepare tax returns would say something this stupid. The TaxProf links to this from a University of Wisconsin academic:
This Article analyzes the ongoing structural transformation by observing and explaining the advantages that accrue from pursuing social and regulatory objectives through the tax code. In particular, this Article identifies a number of legislative and normative advantages that tax-embedded policies offer.
The tax law has one important job: to raise revenue. If this author had ever done business tax returns for a living, she would know what a challenge it is to simply determine taxable income. If she had ever helped a client through an IRS audit, she would know how difficult it is for the agents to simply work through the accounting, let alone run a bunch of social programs on the side. The author should be made to spend three years working at a storefront tax prep business to learn the chaos her views cause outside the faculty lounge.
Baucus’s shift to the right in the last few months (which people had assumed was positioning for the election next year) has antagonized more than just progressives. It seems his Senate colleagues are growing frustrated as well.
And that will severely hamper the chances that a major tax reform bill will make it to the Senate floor.
When you have high tax rates, you make taxpayers highly-motivated to carve out exemptions for themselves. That’s how you get things like HF 633, which cleared the Iowa House of Representatives this week.
The bill would allow employee-owners of businesses to make a one-time election to exclude from Iowa taxable income gain from the sale of employer stock. From the bill (my emphasis):
(a) An employee-owner is entitled to make one irrevocable lifetime election to exclude the net capital gain from the sale or exchange of capital stock of one qualified corporation which capital stock was acquired by the employee-owner on account of employment by such qualified corporation and while employed by such qualified corporation.
(b) The election shall apply to all subsequent sales or exchanges of the elected capital stock, provided it is capital stock in the same qualified corporation and was acquired on account of employment by such qualified corporation and while employed by such qualified corporation.
What is “Capital stock?” From the bill:
“Capital stock” means common or preferred stock, either voting or nonvoting. “Capital stock” does not include stock rights, stock warrants, stock options, or debt securities.
What is a “qualified corporation?” The bill says that would be:
(A) The corporation has been in existence and actively doing business in this state for at least ten years.
(B) The corporation has at least five shareholders.
The “ten year” thing would seem to be an attempt to pair up somehow with the ten-year capital gain exclusion for ten-year businesses — but unlike that provision, it lacks a ten-year holding period and material participation requirement. The “five shareholders” requirement is baffling — and could be easily be avoided by minor share gifts before a sale to create shareholders.
What does it mean to acquire shares “on account” of employment? The bill doesn’t say. Would exercising options under a stock option plan qualify? Is it limited to employer stock bonus plan stock? What if an employee buys stock as an investment? What about founding owners? The bill is unclear, and it shouldn’t be.
I am guessing this bill is being driven by the executives at publicly-traded Iowa corporations, and maybe by Hy-Vee executives, who benefit from employee ownership. While you can’t blame them for trying to carve themselves a break, it would be much better for the rest of us to eliminate this sort of special favor, make the law simpler, and lower rates for everyone. In other words, The Tax Update Quick and Dirty Iowa Tax Reform Plan.
The Ultimate Swiss Army Knive. Flickr Image courtesy redjar under Creative Commons license.
Iowa’s tax law: is there anything it can’t do? The 100 supergeniuses in the Iowa House of Representatives have decided that our dozens of economic development tax credits and breaks just aren’t quite enough to make us creative. To get us off the sofa they Iowa House yesterday passed HF 615 to modify the “innovation fund investment tax credit.” What, you didn’t know there was such a thing? No wonder you can’t innovate your way out of a wet paper bag, Iowa!
Naturally, this requires a political “board,” in this case the Iowa Economic Development Authority. That spells “innovation” right there! And they start out with a new innovation for the innovation tax credit: make it bigger! As explained in an early version of the bill:
Under current law, the economic development authority is required to issue nontransferable tax credit certificates equal to 20 percent of a taxpayer’s equity investment in an innovation fund. The tax credits available for issuance are under the aggregate tax credit limit for certain economic development programs in Code section 15.119, and are limited to a total of $8 million per fiscal year. The bill modifies the credit by removing the 20 percent limitation and specifying that for each fiscal year a total of $8 million in innovation fund investment tax credit certificates shall be issued by the authority to one or more nonprofit corporations operating an innovation fund.
The bill provides that tax credit certificates may be transferred no more than two times and establishes procedures for transferring the credit to another person.
So: the state would now be able to pay up to 100% – or more! of somebody’s investment in an “innovation fund.” And the credits may now be sold — just like in the film credit program! I can practically feel the innovation already.
The “Innovation Fund” web site makes it look like a slush investment fund for the state to funnel money to innovators. Because Iowa is good at running investment funds! Oh, wait:
A decade after the state tried to spark investment in young innovative companies, Iowa taxpayers will foot a $26 million bill — and potentially more — to meet the program’s obligations.
State attorneys reached an agreement in August to avoid a lawsuit from two lenders who backed the Iowa Fund of Funds, a program lawmakers created in 2002 to attract more venture capital investment in Iowa startups.
So the answer to a disastrous and failed tax credit program to jump-start innovation is a new tax credit program to jump-start innovation — only this time with transferable credits! That’s the ticket!
The Iowa House passed HF-615 by only a narrow margin of 97-2. The only no votes were Bruce Hunter of Des Moines, who consistently opposes these boondoggles, and Rick Olson, a Polk County Democrat. That’s one more ”no” than for the film credit program, which passed the House 95-1. So progress, anyway.
Try a real innovation. Get rid of all of the useless economic development credits and tax breaks. Stop paying people to be our friends. Get rid of the futile corporation income tax. Pass a simple low-rate tax law for everyone, like the Quick and Dirty Iowa Tax Reform Plan.
Camp’s Proposed Passthrough Unification Is Not a Step Toward Corporate Integration is the headline of a gated article in this mornings tax notes. Maybe. But the proposal for a pass-through system with mandatory withholding looks to me like a close cousin to a corporate tax with a dividends received deduction. In both cases the tax is paid currently at the entity level, with only one level of taxation. The main difference is the formality of which entity claims the credit for the tax paid.
First Iowa, now New York: Rendering the U.S. Supreme Court Irrelevant (Cara Griffith, Tax.com). Like Iowa in its KFC decision, New York says the world has changed since the Supreme Court ruled that you had to have physical presence in a state before the state could tax you, and now “economic presence” is enough. This makes Cara Griffith uneasy:
We are on a dangerous path if we allow state courts to take this approach. The U.S. Supreme Court’s 1992 opinion in Quill Corp. v. North Dakota remains good law. Unless and until it is overturned (or federal legislation is enacted to the contrary), the bright-line physical presence rule established in Quill is the law of the land.
Not your corporate welfare. Just ours. Iowa Senate taxwriters have been eloquent in criticizing the corporate welfare famously doled out to fertilizer companies over the last year. It turns out, though, that not all corporate welfare is bad, to them. Just that proposed by the other party. The Senate Ways and Means Committee advanced a set of its own welfare programs yesterday, including:
SF 238, which would provide a 30% tax credit (subsidy) “for persons who construct, install, and place in service an electric vehicle facility or a natural gas vehicle facility.” So if you buy a Chevy Volt, Senate Ways and Means wants to pay 30% of the cost of installing special plug-ins.
SSB 1240, which “increases to $50 million from $45 million the amount of historic preservation and cultural and entertainment district tax credits.” These are a cash cow for well-connected developers and rehabbers.
SF 205, which opens up an existing program to divert withheld employee taxes “to create economic incentives that can be directed towards business.” The bill “removes the requirement that an employer…be located in an urban renewal area.” In other words, it makes it just another “incentive” slush fund to pay people to be our friends.
So it’s not a principled opposition to business subsidies. They just want different ones.
Far better to get the state out of the subsidy business and make the tax system good for everyone — not just those with the pull and the consultants to game the system. Far better to enact The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.
The article takes for granted that the costs the regulations will impose will exceed the benefits:
Knowledgeable tax return preparers—who are reminded each year through education requirements to conduct effective due diligence on small businesses—can have a much greater impact on compliance than IRS auditors.
That makes an unwarranted assumption: that the IRS can create “knowledgeable tax return preparers.” It can’t. It can make people fill out paperwork, go through the motions of paying for CPE, and take meaningless open book literacy competency tests, but it can’t make anybody competent.
The IRS has limited resources. Semi-literate South Florida grifters are stealing billions through fraudulent refunds. Yet the IRS seems to think its problem is honest preparers.
Finland will lower the corporate rate to 20 percent in 2014, down from the current rate of 24.5 percent (and 26.0 percent in 2011)…
Finland plans to pay for part of the rate cut by boosting the effective investor tax rate on dividends paid by companies listed on the Finnish stock exchange.
Why not instead create a full dividends-paid deduction. It would eliminate the need for a rate preference for dividend inocme while eliminating the destructive double-tax on corproate earnings.
Few of us would encourage criminal gangs to work out their disagreements so they could be more effective criminals. Yet many well-meaning folks think it’s a good idea for politicians to be “bipartisan.” That can be the public policy equivalent of a gang truce. Remember that the disastrous Iowa Film Credit enjoyed wide and bipartisan support.
Now they’ve reached across the aisle at the state house to take more money out of our pockets for the benefit of the well-connected and well-lobbied. From Radio Iowa:
Key lawmakers from both political parties say it’s likely the Iowa legislature will boost the amount of state tax credits available to lure new businesses to Iowa.
This year state officials can offer a total of $120 million in state tax credits for a variety of business expansion projects. Lawmakers appear poised to raise that to $185 million for next year.
Isn’t that wonderful. Taking money from the people who already pay taxes at some of the highest rates in the country to lure and subsidize their competitors. Well done, guys. It’s like bringing your wife’s purse to the bar to buy drinks for the girls. It’s not impressive. They may take the free drinks, but they realize you’ll raid their purses if you get the chance. And any girl you do get that way probably isn’t a real prize.
WCFCourier.com says there is also bipartisan agreement to enrich the historic tax credit program, which allocates construction capital to well-connected local developers at the expense of their non-subsidized competition.
Thanks to sequestration, they can’t afford to run the washing machine. The IRS is Airing its Dirty Laundry (Jana Luttenegger, Davis Brown Tax Law Blog).
Details, details. Details matter when you claim a childcare tax credit on your Iowa return. Like, for example, the address of your child care provider from a denial of an Iowa tax protest released today
The Department reviewed your 2009 Iowa individual income tax return and denied the child care credit. Your protest claims you provided adequate documentation to support the credit. After our review, our position is that we believe Form 2441, the tax form for child care expenses, is fraudulent. The owner/occupant at the address reported as that of the provider stated he does not know and has never heard of [your child] and there has never been any child care business operating at his property. It is unreasonable that you would not know the address of where your children are while you are at work. Therefore, your protest is denied.
In fairness, my parents often had no idea where I really was when they were at work…
Most people would say that making low-income taxpayers pay a higher tax rate on each additional dollar they earn would be a funny way of “helping” the poor. Yet that’s just the approach of a bill passed yesterday by the Iowa Senate to raise Iowa’s earned income tax credit (SF 422). The bill would raise the Iowa earned income credit from current 7% of the federal credit to 20%.
The credit phases out as income increases; that means taxpayers who receive the credit have a high hidden tax rate on additional income — their regular tax rate, plus the lost earned income credit. That gives them higher tax rates than the highest earners on each additional dollar of income. Here is a new chart showing the marginal tax rates on an EIC recipient with three children as income rises under SF 422:
The marginal Iowa tax rate on EIC recipients would be around 10%. That compares with an effective rate of just over 6%, counting the deduction for federal taxes, for Iowa’s highest earners. Combined with the federal effective phase-out rate, the EIC earners face marginal rates over 50%. That makes the EIC a poverty trap.
The EIC is a “refundable” credit — which means that if you don’t have enough tax to use the credit, the government writes you a check for the difference. That makes it a welfare program, not a tax cut. Yet the press often gets this wrong:
Spending is still spending, even when it’s run through a tax return. This spending, though, is likely to get no further; even if the House passes this – very unlikely – the Governor vetoed a similar bill last session.
I recently spoke at a conference about transparency in state tax administration. Among other issues that were discussed, I suggested that there is a culture of mistrust between taxpayers and practitioners and state tax officials. When I suggested that the feeling was one of “us” vs. “them,” heads began to nod and many mouthed a silent yes. It confirmed what I already knew: the culture of mistrust between taxpayers and state tax officials is very real.
…
But state tax authorities seem to perpetuate the culture of mistrust, in part because they have a tendency to play “hide the ball.” That is, they don’t let taxpayers in on the rules by which they are expected to play. The reason is that state taxing officials have a significant amount of discretion to adjust taxpayer incomes yet they don’t provide aroadmap for how and when that discretion will be used.
The 4.5% tax on AGI, with no credits and no deduction for federal income taxes, would be an alternative to the current multi-rate, high-loophole system. Taxpayers could choose which way to file.
Of course, taxpayers would compute their taxes both ways and pay the lower amount — making it an Alternative Maximum Tax. With the Alternative Minimum Tax, taxpayers compute their tax two ways and pay the higher amount. It would add one more complication to an already complex system. And, as I have noted, AGI is a flawed measure of taxable income.
The bill has just about no chance in the Iowa Senate, absent some incriminating photos of Democratic senators falling into Republican hands. Bill opponents made dreary but predictable soak-the-rich arguments against the bill:
Democrats, however, criticized the bill for affecting just a fraction of Iowa taxpayers or for providing far more benefits to high-income earners.
Citing the Department of Revenue data, they noted about 5,000 income earners making more than $500,000 stand to save as much from the flat tax – around $90 million – as the 326,000 earners making less than $90,000 a year.
They aren’t saying that the lower earners don’t benefit. They are just saying that the high earners benefit too much. Of course, it means the high income earners pay a lot more tax than the lower earners right now. It’s a silly argument — even sillier if you consider that state taxes are an awful tool for income redistribution. My analysis indicates the bill would benefit most filers, not just the “rich.”
I don’t believe the Alt Max Tax was seriously intended to become law. I think it was designed to try to keep the cause of income tax reform alive in a year that the Governor has no interest in it. It may also be a trial balloon to see if a proposal that lacks federal tax deductibility would draw fatal fire from the powerful lobbying group Iowans for Tax Relief. So far, no. While the bill (formerly HF 3, now HF 478) is flawed, maybe it advances the debate. Maybe next year, they’ll take up something like The Quick and Dirty Iowa Tax Reform Plan.
IRS extends certification rule, making Work Opportunity Credits available for all of 2012. Congress retroactively extended the Work Opportunity Credit to 2012 at the beginning of 2013. Unfortunately, one of the qualifications for taking the credit is to certify that an employee qualifies for the credit within 28 days of hiring. That made the credit useless for most of 2012.
The IRS has now given employers until April 29, 2013 to file the necessary paperwork with the local Job Service offices. Notice 2013-14 has the details. Accounting Todayhas more.
When you are running a big criminal tax conspiracy, never hit “reply all”. From Bloomberg News:
Everybody knows the danger of sending things inadvertently in an e-mail. Beda Singenberger’s case shows you also have to be pretty careful when you mail things the old-fashioned way.
Over an 11-year period, federal prosecutors charge, Swiss financial adviser Singenberger helped 60 people in the U.S. hide $184 million in secret offshore accounts bearing colorful names like Real Cool Investments Ltd. and Wanderlust Foundation.
Then, according to a prosecutor, Singenberger inadvertently mailed a list of his U.S. clients, including their names and incriminating details, which somehow wound up in the hands of federal authorities.
I will fight for the right to tax you to subsidize other people. Governor Branstad is touchy about criticism of the massive tax breaks for the Southeast Iowa Orascom fertilizer plant. Radio Iowa reports:
“I’m here to make it clear that the chief executive of this state is on your side and we will fight for these jobs and I want to make it clear that when we make a promise to Lee County — or to any county in Iowa for that matter — it’s a promise we’re going to keep, no matter what they might say in Des Moines in any committee meeting,”
Never mind the high possibility that the plant would have been built without our tax money. Never mind the moral problem of taxing existing businesses and taxpayers to lure and subsidize outsiders. Never mind that political allocations of investment capital are always and everywhere unwise. Forget the lost opportunities for taxpayers to spend the money on their own projects. Jobs!
The Governor also hinted at darker forces opposing the tax credits, reports KCCI.com:
And he said he believed the Koch brothers were behind some opposition to the plant because it would hurt their fertilizer business.
So Iowa Democrats opposing the subsidies are tools of the libertarian Koch brothers. Who knew?
David Brunori, Things to Read, Sites to Visit. (Tax.com). He shares some online resources, but tragically fails to mention the Tax Update.
Peter Reilly, No Fans Of Sister Wives At The IRS ? As far as I’m concerned, the possibility of consolidated individual returns should be all the argument needed against polygamy.
“Ultimate Swiss Army Knife” image courtesy redjar under Creative Commons license.
The Iowa income tax as Swiss Army Knife. The Iowa Senate Veterans Affairs Committee yesterday sent to the floor a proposal for up to $1,500 in tax credits for hiring an Iowa resident who is “a member of the national guard, reserve, or regular omponent of the armed forces of the United States” for a job of at least 30 hours a week. The bill would also give an additional $500 tax credit for each year the employee is called to active service for at least 30 days.
SSB 1064 cleared the committee unanimously. After all, who would vote against the “Hire a Hero Tax Credit?” But this is a classic example of a feel-good tax provision that clutters the tax law, is very difficult to enforce, and would not accomplish enough to be worth the trouble.
Nobody will hire an employee just to get a $1,500 tax credit. You hire somebody because you have work to do. Because it’s so hard to find and keep good employees, you hire the person you think is most likely to work out; the cost of a hiring mistake can be a lot more than $1,500. It will be hard to enforce — especially the provision saying the credit is unavailable if the new employee replaces another “eligible employee.” Will the state really examine that? Like many credits, it won’t change behavior; it will just be harvested by taxpayers who would have hired the same military people anyway.
Still, why not make a nice gesture to show our voters how much we care? Because every feel-good tax break has a cost. It costs money to comply with and enforce. It also creates a new anti-tax reform interest group; any attempt to clear away expensive and ineffective tax breaks to make a better tax system for everyone will be fought by those few that collect it. It makes a good tax system for everyone just a little bit harder.
The primary purpose of the tax law is to finance government operations. When it become a Swiss Army Knife of public policy, it becomes a little less effective at its real job every time you add a new gadget.
Swiss Bank corpse fined $58 million for tax cheating. The Wegelin Bank, which is closing as a result of its legal troubles, was sentenced yesterday to pay a $58 million tax evasion fine for helping clients evade U.S. taxes. Robert W. Woodhas more.
In January, Sen. Charles Grassley, the 79-year-old Iowa Republican, chastised acting IRS commissioner Steven Miller over his recent proposal to restrict the agency’s whistleblower program, already an object of criticism since its creation in 2006. The proposed curbs, Grassley wrote in a letter to Miller, showed one thing: that the IRS and its boss, the Treasury Department, “view whistleblowers with hostility.”
What exactly is at issue? The current whistleblower rules say a tipster can collect a reward of 15%-30% of proceeds brought in as a direct result of a tip. The dirt has to involve tax evasion of at least $2 million or tax fraud by an individual making at least $200,000 a year.
Miller’s proposed restrictions will likely shrink payouts. Among the curbs: making it nearly impossible for whistleblowers to share in rewards stemming from a company’s inflation of losses, and excluding from rewards any money brought in from so-called Fbar fines.
Apparently the IRS would rather spend its time making experienced preparers take stupid open book tests for permission to continue what they have been doing for years than to actually pursue tax cheats. Only two whistleblower claims have been paid out, but the IRS feels it has plenty of time and resources to appeal the shutdown of its preparer regulation program.
Jeremy Scott, Is the U.S. Tax Gap as Big as Italy’s?(Tax.com). “But numbers from a New York Times article about Italian tax evasion suggest that the United States isn’t doing much better than one of Europe’s most notoriously inefficient tax collectors.”
So the sequester takes effect. That made my commute like “Mad Max,” where I threaded my car between craters on shattered, lawless roadways before picking up the office Friday bagels, ignoring les miserables begging for a bagel crumb outside the door.
Well, OK, it was like my usual Friday commute, but with snow. But we will keep our eyes open for the chaos we know is right around the corner!
Iowa Senate advances limited property tax bill. The Sioux City Journal reports:
Senate Study Bill 1136, which passed the Senate Ways and Means Committee on a 9-6 party-line vote, would enable all businesses to be taxed at a lower rate on the first $324,000 of their assessed property value. Commercial property values above that threshold would be taxed at the current 100 percent rate.
$324,ooo isn’t really that much property for a business, even at Iowa property values. The Governor proposes to reduce the taxable value to 80% of the value for all commercial property over four years.
House GOP advances “flat tax” idea(Radio Iowa). The Iowa House Ways and Means Committee sent HF 3 t0 the House floor yesterday. The bill would enact an optional income tax of 4.5% of adjusted gross income; taxpayers could elect to file under the HF 3 system or Iowa’s current system.
I don’t see this as a serious effort to pass a bill, given the flaws in using AGI as a tax base that I have pointed out. It has next to no chance of approval in the Iowa Senate, controlled by Democrats. At best it’s an attempt to keep much-needed income tax reform alive at a time when the Governor seems only interested in property taxes. Maybe next time they’ll get serious and pursue The Tax Update Quick and Dirty Iowa Tax Reform Plan.
Governor Branstad has signed the bill conforming Iowa’s tax law to federal changes enacted last month. The Governor signed SF 106 yesterday afternoon.
The bill allows taxpayers to use several federal provisions in computing their 2012 Iowa taxes, including:
- The federal Section 179 deduction of up to $500,000.
- The federal above-the-line deductions for tuition and educator expenses.
- The exclusion for IRA distributions to charity for taxpayers who have reached age 70 1/2, and the transitional rules for January 2013 charitable rollovers of IRA distributions.
- The optional deduction for state and local sales taxes.
The bill does not conform Iowa to federal bonus depreciation; Iowa filers will normally use federal standard MACRS depreciation instead.
Tony Nitti, Senate Proposal for Tax Reform Part II: Democrats Seek To End S Corporation Payroll Tax Loophole. It’s similar to nonsensical proposals put forward in prior years to tax S corporation K-1 income when 75% or more of revenues are “attributable” to three or fewer shareholders — an impossible standard to evaluate in many cases, and one that discriminates against the smallest S corporations. It shows they are lazy — the problems with the approach are well known, yet the won’t make the effort to correct, instead trotting out the same old bill. It just shows they aren’t serious.
David Cay Johnston finds the cuts to IRS funding that would result from the impending sequester “Particularly Devastating” (Tax.com)
The Iowa House of Representatives passed without changes SF 106, the bill updating Iowa’s income tax to incorporate last month’s Fiscal Cliff tax bill. The bill conforms to all federal changes except for bonus depreciation, which remains unavailable on Iowa returns.
Now the bill goes to Governor Branstad. The Governor vetoed a prior conformity bill because it adopted bonus depreciation; he is expected to sign this one.
The early passage of these bills is a relief to taxpayers affected by the federal changes. Now they know how to file their Iowa 2012 returns. Among the items affected by the bill:
- Section 179 depreciation. Iowa now adopts the federal $500,000 limit for 2012 and 2013.
- IRA charitable distributions up to $100,000
- The above-the-line deductions for educator expenses and college tuition
- The optional deduction for state and local sales taxes.
No word yet on when the Governor will act on the bill.
Charles R. Barbour, who entered his plea to one count of income tax evasion in a proceeding before U.S. Magistrate Judge Celeste F. Bremer, will be sentenced on May 9.
In it, Barbour admitted that he understated tax year 2006 income in the amount of nearly $81,000, tax year 2007 income in the amount of nearly $51,000, tax year 2008 income in the amount of nearly $52,900 and tax year 2009 income in the amount of $11,300.
From the plea agreement it appears that the charges involve diversion of business receipts from his denture-making business to a personal bank account, and improper deductions:
Barbour willfully claimed false business expenses on the Schedules C for tax years 2007, 2008 and 2009; deducting internet and cable expenses for his residence as advertising expense; rent payments on a condominium and an apartment as rent expense; loan repayments to his parents as equipment repairs and maintenance expense; payments for his daughter’s medical expenses as medical supplies; payments to a local country club as professional development; and child support payments as professional fees and contract labor expenses.
The standard IRS audit programs for business expenses look for personal expenses disguised as business expenses, and an experienced examiner knows where to look. That makes sneaking personal expenses onto a business return a bad bet — and if you make a habit of it, it can become a much bigger problem than back taxes and penalties.
Look at Table 1– where it says that the average premium for young healthy males will go from $2,000 to a little over $5,000. Yikes.
When the largely-optional penalty for not buying insurance is $695, it doesn’t seem likely that healthy young males will buy a lot of insurance — especially when they can buy it when they get sick because of the rules against pre-existing condition limits. It’s hard to imagine this working well.
By saying that Quill created a perplexing inquiry gives credence to the idea that states can get around the physical presence requirement, but they can’t.
The Iowa Senate approved the Iowa tax code conformity bill, SF 106, yesterday. The bill was approved 48-0, which is a good sign that it will pass quickly — enabling Iowans to get on with filing their 2012 business returns.
The bill updates Iowa’s income tax for the Fiscal Cliff tax bill changes passed last month by Congress. Key items updated to match federal rules include:
- Conforming with the $500,000 federal Section 179 deduction limit for 2012 and 2013.
- Allowing the optional deduction for state and local sales taxes for 2012 and 2013.
- Conforming to federal research credit rule changes
- Continuing the IRA charitable distribution exclusion
- Adopting the federal “above the line” deductions for college tuition and for out-of-pocket expenses of educators.
The bill does not adopt federal bonus depreciation for 2012 and 2013. The bill does not show up yet on the calendars for the House Ways and Means Committee or for House floor debate, so it may not get to the Governor this week. Update, 9:00 am: An e-mail from the House floor manager for the bill says the House may take it up as soon as tomorrow.
More boffo reviews for the shutdown of the IRS preparer regulation program!
It’s hard to choose just one IRS knee-slapper, but here goes. The agency insists IJ’s “suggestion that the return preparer program is the product of a tainted lobbying effort is belied by support for the program from the Taxpayer Advocate, the Electronic Tax Administration Advisory Committee, numerous consumer advocacy groups, and comments from individual practitioners.” The ETAAC is an IRS-administered panel whose members include lawyers and CPAs—who weren’t subject to the regulations—and people with connections to H&R Block and Jackson Hewitt, big businesses happy to help the government force the little guys out of the industry.
Protecting the taxpayers has never been the point.
Rather than continuing to fight in court, the agency would do better to cashier the rules on legal and economic grounds. They are a classic example of big business harnessing government power to aid the powerful at the expense of small-business competitors. Meantime, won’t someone in Congress tell the IRS to stop exceeding its legal authority?
Regina Jimenez, 60, of Clinton pleaded guilty to two counts of filing false tax returns. She faces up to three years of prison, a fine of up to $1 million and costs of prosecution on each count.
According to court documents, Jimenez operated AA Accounting & Tax Services, Inc. in Clinton from approximately 2007 through 2011. Jimenez used the business to facilitate the theft of more than $200,000 from a client who believed that Jimenez would use the money to pay the client’s taxes.
There’s never a good reason to have your tax preparer pay your income taxes for you. If your preparer tries to get cash from you “to give to the IRS,” ask many questions.
Remember, if the farmer purchases a corn call option as part of this hedging strategy, this no longer qualifies as a hedge (even though is a normal strategy of selling actuals and buying the “board”, for tax purposes, it is not a hedge) and is considered speculation. In many cases, the tax treatment can be harsh since if the option produces income, the IRS will treat it as ordinary and if it produces a loss, it will be considered a capital loss (the worst of both).
Why you should spring for a good GPS unit. You might get lost otherwise, like a star-crossed couple in my home town of West Des Moines. The Des Moines Register reports:
The incident occurred at about 2:12 a.m. Friday, when a car pulled into a police station driveway at 250 Mills Civic Parkway marked for “Authorized Personnel,” according to a police report.
Police said the car passed two patrol cars and drove up a private drive before turning around when it reached a garage. An officer in one of the patrol cars then turned on his top lights and stopped the car.
The driver told officers they were trying get to Beach Girls, an adult entertainment venue at 6220 Raccoon River Dr., West Des Moines, according to the report.
The two officers reported that both the driver and passenger had bloodshot, watery eyes and that the vehicle smelled of marijuana.
If they mistook the West Des Moines cop shop for a strip club, either they already had enough fun for the night, or strip joints have changed a lot since my bachelor days.
Iowa legislature goes 0-for-January. The Iowa General Assembly has been completed the first three weeks of its 2013 session without settling what Iowa’s tax law is for last year. The legislation needed to update Iowa’s 2012 tax law for the retroactive federal changes enacted in the Fiscal Cliff bill at the beginning of this year hasn’t cleared either house of the legislature. The Senate Ways and Means Committee at least moved its bill (SF 106) out of committee Wednesday, while House Ways and Means hasn’t even done that much with its bill (HF 110)
Many Iowans were affected by the retroactive changes, including educators and people who made energy-saving home improvements. Almost all businesses are affected by the Federal extension of $500,000 Section 179 expensing of depreciable property for 2012. Yet these taxpayers can’t complete their Iowa 2012 tax returns until the legislature decides what parts of the federal changes to accept.
The silliest part: we pretty much know what the bill will look like. It’s almost certain that it will adopt federal Section 179 rules and the other “extender” rules, without adopting federal “bonus depreciation.” That means there’s no reason to dawdle. But dawdle they do.
50 years for Wasendorf. The Wasll Street Journal reports:
Russell Wasendorf Sr., was sentenced to the maximum 50 years in jail after admitting to orchestrating a fraud at his futures brokerage and misleading regulators for almost 20 years.
Mr. Wasendorf, 64 years old, pleaded guilty last September to the fraud at Peregrine Financial Group Inc. that federal prosecutors said had cost clients $215.5 million and masked a business that never was profitable. He also was ordered to pay the full amount of missing funds in restitution.
Mr. Wasendorf got away with it by forging paper bank statements for the regulators and auditors. The scam blew up when Peregrine was forced to move to electronic account verification. Sadly, the chances of full restitution being paid to his victims are less than the chances he will walk out of prison at the end of his sentence.
The IRS also claimed that it would suffer unspecified “costs associated with . . . finding other positions for the 167 Service employees currently working on the return preparer project.” [Institute for Justice attorney Dan] Alban noted, in response, that just over two weeks ago, the IRS complained about understaffing, since “[o]verall full-time staffing has declined by more than 8% over the last two years, and staffing for key enforcement occupations fell nearly 6% in the past year.” You’d think that the IRS would welcome, not rue, the idea of having nearly 200 employees available for other tasks – like answering the phone (at current staff levels, they only do that about 70% of the time).
The preparer regulation program has always seemed a frivolous use of IRS resources when tax complexity and identity-theft fraud are making the tax law almost impossible to administer.
I hate extra apostrophes. Careful Tax Update readers know that I have a terrible habit of inserting extra apostrophes, creating an unintended possessive. I know the rules, but my fingers betray me when typing. Fortunately I can easily change a blog post to turn “it’s” to “its.” Not everybody is so fortunate.
Unless, of course, Steven owns “Steven’s” building.
Iowa is collecting more tax money than it is spending. Iowa House Republicans propose to give the money back as a one-time tax credit. The Des Moines Register reports:
The proposal would capture the state’s estimated $800 million budget surplus, divide it equally among the state’s income tax payers and issue an income tax credit to every taxpayer for his or her share. Senate Republicans said last week the credit amounts to $375 for individuals or $750 for couples who file jointly.
That means, for example, if a married couple’s state income tax liability was $1,000, they would receive a $750 tax credit, reducing the amount they were actually required to pay to $250. If a payer’s burden was less than $375, he would receive a credit equal only to his actual bill.
It’s a simple plan that treats the surplus as a non-recurring event. Unfortunately, there is nothing simple about Iowa’s tax law otherwise. I’d prefer to see it returned as part of a tax reform plan.
House Democrats prefer to spend the money, and the Governor wants some of it to fund his education reform plan. ISU economist David Swenson says the money should be run through the government:
Drawing on a statistical model that predicts economic impacts, he said $780 million in government spending could support roughly 2,000 more jobs than the same amount of spending by households.
Yes, the magical power of the government to transform your money into jobs. If we just gave the government infinite money, we’d get infinite jobs. If that worked, you’d think we’d have more jobs than ever, considering that Federal and state governments are spending more money than ever.
Tax return preparers who just recently were rushing to get their preparer tax identification numbers from the IRS before it starts accepting 2012 tax returns on January 30 are in limbo after a federal district court enjoined the Service from enforcing requirements under the registered tax return preparer (RTRP) designation.
The IRS’s online PTIN system appears to be unavailable. People familiar with the system are uncertain why the IRS took it offline and what its unavailability means for the hundreds of thousands of potential PTIN registrants.
“From a practical point of view, [the IRS] has already shut the [PTIN] system down,” said Dan Alban of the Institute for Justice and the lead attorney for the plaintiffs in Loving v. IRS, No. 1:12-cv-00385 (D.D.C. 2013) “Whether they are legally required to do so is the question.”
Well done, IRS! Preparers are required to have a PTIN. The IRS apparently tied it’s PTIN software to the preparer regulation system overturned earlier this month. Another triumph for tax administration.
TaxProf, What’s FATCA Got To Do With It? Tina Turner Renounces U.S. Citizenship. It’s always easier for the wealthy to avoid the ridiculous paperwork the tax law imposes on Americans abroad. It’s the little jaywalkers that get shot to ensure the serious money-launderers get slapped on the wrist.
Andrew Mitchel has posted two videos explaining Form 5471. Think that sounds dull? If you fail to report your interest in a foreign corporation, the $10,000 fine will make it interesting.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
